Economic Watch

Golden-egg-laying geese are fleeing over Rubicon, leaving SA behind

Many expected Finance Minister Pravin Gordhan to cross the proverbial economic Rubicon in last week’s national budget. It did not happen and since then things have turned for the worse.

In a number of ways, the expectations and atmosphere preceding last week’s budget speech displayed similarities with those preceding the then President P.W. Botha’s speech in August 1985 to a public meeting at the Natal conference of the then governing National Party.

After many years of international isolation and growing domestic unrest, especially from black trade unions, there were widespread expectations for announcements about strong initiatives to turn the country’s fortunes around. But Mr Botha did not cross the political Rubicon as expected and matters became worse over the years that followed.

This time around, after multiple years of economic slowdown, rising unemployment, escalating social unrest on a number of fronts (including, again, organised labour), disappointing foreign and domestic investment levels and the looming danger of a sovereign downgrade to junk status, Mr Gordhan was expected to pull a rabbit out of the hat.

The immediate reaction of the markets the next day, with the rand trading 40c lower, bonds worsening by 20 basis points and top ratings agency Standard & Poor’s (S&P), saying that subdued economic growth would likely continue in the medium term and pose a threat to fiscal consolidation plans, tells its own story: general disappointment where it really matters.

Nobody believes that Mr Gordhan has crossed the economic Rubicon to stronger economic growth in his speech, which was long on policy promises and short on figures. And it is economic growth above all that South Africa needs to turn its economic, social stability and employment prospects around.

The geese are fleeing

Minister Gordhan’s dilemma is that so many of the geese that lay the economic golden eggs have either already fled across their own Rubicons, are in the process of doing so or are likely to, should domestic conditions worsen, as increasingly seems likely.

Not all these proverbial geese are measurable in cold figures, like the almost 1 000 dollar millionaires who left the country last year or the shrinking tax base, due to emigration of highly skilled strong income earners. According to a New World Wealth (NWW) report, approximately 8,000 high net worth individuals (HNWIs) left the country between 2000 and 2014 – a number now closer to 9,000 by the end of 2015.

Yet the more important golden-egg-laying geese, especially for foreign investors and HNWIs, are not measurable in terms of cold figures.

Top of this second list of ‘geese’ are political stability and trust in political leadership, followed by social stability and personal/family security and economic/professional prospects.

This, among others, translates into what Professor Alan Hirsch of the University of Cape Town’s Graduate School of Development Policy, in his analysis of the budget speech called “political capital”. In his estimation Minister Gordhan will require “require buckets of political capital” to deliver on his budget promises.

In short, one of the big uncertainties in the market is whether Mr Gordhan has the political clout and support of his cabinet colleagues and state institutions to deliver on the promises/intentions of his budget.

What are the signs?

We have already seen what the immediate reaction of the market was. Of greater concern, however, were developments on the political front the day after the introduction of the budget.

A letter from the elite police investigative unit, commonly known as the Hawks, accusing Mr Gordhan of complicity in establishing a rogue investigative unit inside the Treasury, was leaked to the media. He, in response, threatened to go to court over the matter.

A public spat also occurred between him and South African Revenue Service commissioner Tom Moyane, with Mr Gordhan admitting that their relationship was hostile. According to some reports he threatened to quit Cabinet on the eve of the budget speech if Moyane was not replaced by President Zuma who is responsible for appointing the SARS commissioner.

Many analysists see these developments as part of deep-seated factional and ideological battles within the broader governing alliance.

It is also particularly bad news against the background of wider scepticism in key market players, as illustrated by the commentary of London-based emerging market specialist Peter Attard Montalto who said: “The ultimate problem is that everyone in South Africa knows (or the ANC knows) that the ANC always has the right policy on the table around these microeconomic reforms. The problem is that it’s politically impossible to implement.”

The golden-egg-laying geese, domestically and internationally, are also anxiously watching developments on the social stability front at especially universities, with mounting fears that a full-blown racial conflict could develop.

And there might be more bad news on its way. At the time of writing, reports had it that on the 1st of March the United Kingdom’s largest retail bank, Barclays Plc, would be announcing that it has decided to sell its stake in ABSA bank in what is described as “the biggest disinvestment in South Africa since the spate that hit the country during the mid-1980s”.

Ironically, that “spate of disinvestment” of the mid-1980s was very much part of the scene-setter for President Botha’s “Rubicon speech”.

Conclusion

Last week’s Rubicon-like budget speech has not staved off the danger of the dreaded sovereign downgrade to junk status for South Africa. Expect the golden-egg-laying geese to remain restless. A huge responsibility rests on the shoulders of not only Minister Gordhan, but on leadership in all spheres of society – from the most sectarian to business to religious and organised civil society – to return the country to a trajectory of peace, stability and prosperity.